1 The Indian Contract Act, 1872
Act IX of 1872 by Dattaram P Shinde © Copyrights reserved
3 Questions An old lady, by a deed of gift, made over certain property to her daughter D, under the direction that she should pay her aunt, P ( sister of the old lady), a certain sum of money annually. The same day D entered into an agreement with P to pay her the agreed amount. Later, D refused to pay the agreed amount on the plea that no consideration had moved from P to D. Can P sue D for annuity? A agrees to sell a house worth Rs. 10,00,000 to B for just Rs 2,00,000. A’s consent to the agreement was freely given. B pays Rs.1,00,000 as part payment. Later on A refuses to give possession. Is this a valid contract? Can B sue A for possession?
4 What? When a party to an agreement promises to do something, he must get “something” in return. This “something” is defined as consideration. Consideration is one of the essential elements to support a contract. e.g. A agrees to sell his red colour Honda City car to B for Rs. 5,00,000. Car is the consideration for B and price is the consideration for A. Subject to certain exceptions, an agreement made without consideration is VOID.
5 Definition Section 2(d) :When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
6 Essential elements of Consideration
An act i.e. doing of something e.g. A promises B to guarantee payment of price of the goods which B sells on credit to C. Here, selling of goods by B to C is consideration for A’s promise. 2. Abstaining or refraining from doing something e.g. A promises B not to file a suit against him if he pays him Rs The abstinence of A is the consideration for B’s payment. 3. A return of promise e.g. A agrees to sell his horse to B for Rs. 10,000. Here, B’s promise to pay the sum of Rs. 10,000 is the consideration for A’s promise to sell the house and, A’s promise to sell the horse is the consideration for B’s promise to pay the sum of Rs. 10,000.
7 Why (Need)? Gratuitous or Voluntary promises are often made rashly and without due deliberation. When Consideration is absent, there is no means or remedy to compel the performance of an agreement. Hence, law disfavours an exchange of promises which would result in one of the parties obtaining “ something for nothing”.
8 Legal rules as to consideration
9 Legal rules as to consideration
RULE 1 : Consideration must move at the desire of the promisor An act constituting consideration must have been done at the desire or request of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it will not be a good consideration. e.g. A saves B’s goods from fire without being asked to do so. A cannot demand payment for his services. RULE 2 : Consideration may move from the promisee or any other person. As long as there is consideration for the promise, it is immaterial who furnished it. e.g. An old lady, by a deed of gift, made over certain property to her daughter D, under the direction that she should pay her aunt, P (sister of the old lady), a certain sum of money annually. The same day D entered into an agreement with P to pay her the agreed amount. Later, D refused to pay the agreed amount on the plea that no consideration had moved from P to D. It was held that, P was entitled to maintain suit as consideration had moved from the old lady, sister of P, to the daughter, D.
10 Legal rules as to consideration
RULE 3 : Consideration may be an act, abstinence of forbearance of a return promise e.g. A borrows from B Rs. 100 at 20% p.a but fails to pay the amount. When B is about to file a suit, A agrees to pay a higher rate of interest. B as a result does not file a suit. This forbearance on the part of B to file a suit is sufficient consideration and B can enforce the promise by A to pay the higher rate of interest. RULE 4 : Consideration need not be adequate. Consideration i.e. “something in return” need not necessarily be equal in value to “something given”. Consideration need not be adequate to the promise, but it must be of some value in the eyes of law. The adequacy of consideration is for the parties to consider at the time of making the agreement , not for the Court when it is sought to be enforced. e.g. A agrees to sell a house worth Rs. 10,00,000 to B for just Rs. 2,00,000. A’s consent to the agreement was freely given. B pays Rs.1,00,000 as part payment. Later on A refuses to give possession. Is this a valid contract? Can B sue A for possession?
11 Legal rules as to consideration
RULE 5 : Consideration may be past, present or future Past consideration : When consideration by a party for a present promise was given in the past, i.e. before the date of the promise, it is said to be past consideration. e.g. A renders some service to B at the latter’s desire. After a month, B promises to compensate A for the services rendered to him. It is past consideration. A can recover the promised amount. Present/executed consideration : When consideration is given simultaneously with promise, i.e. at the time of promise, it is said to be present consideration. e.g. A receives Rs in return for which he promises to deliver certain goods to B. The money A receives if the present consideration for the promise he makes to deliver the goods. Future/executory consideration : When consideration from one party to the other is to pass subsequently to the making of the contract, it is future or executory consideration. e.g. D promises to deliver certain goods to P after a week; P promises to pay the price after a fortnight. The promise of D is supported by the promise of P. Here the consideration is future or executory.
12 Legal rules as to consideration
RULE 6 : It must be real and not illusionary Consideration must be real, competent and of some value in the eyes of law i.e. it should not consist of the following: Physical Impossibility : A promises to put life into B’s dead wife if B pays him Rs A’s promise if physically impossible of performance. Legal Impossibility : A owes Rs. 100 to B. He promises to pay Rs. 100 to C, the servant of B, who in return promises o discharge A from the debt. This is legally impossible because C cannot give discharge for a debt due to B, his master. Uncertain Consideration : A engages B for doing a certain work and promises to pay a reasonable sum. There is no recognised method of ascertaining the “reasonable” remuneration. The promise is unenforceable as consideration is uncertain. Illusionary Consideration : Two of the crew of a ship deserted it halfway through a voyage. The captain thereby promised to divide the salary of the deserters among the rest of the crew if they worked the vessel home. It was held that they could not recover the amount as the consideration was illusionary. They were already under an obligation to bring the vessel home.
13 Legal rules as to consideration
RULE 7 : It must be something which the promisor is not already bound to do A promise to do what one is already bound to do, either by general law or under an existing contract, is not a good consideration for a new promise, since it adds nothing to the pre – existing legal or contractual obligation. e.g. A promised to pay B, who had received summons to appear at a trail in a civil suit, a certain sum being a compensation for the loss of time during his attendance. It was held that, the promise was without considerations B was under a duty imposed by law to appear and give evidence. RULE 8 : Consideration must not be illegal, immoral or opposed to public policy The consideration given for an agreement must not be unlawful. Where it is unlawful, the courts do not allow an action on the agreement.
14 PRIVITY OF CONTRACT
15 PRIVITY OF CONTRACT It is a general rule of law that only parties to the contract may sue and be sued on that contract. This rule is known as the “Privity of Contract”. Privity of Contract means relationship subsisting between the parties who have entered into contractual obligations. It implies a mutuality of will and creates a legal bond or tie between the parties to the contract.
16 EXCEPTIONS to Privity of Contract
EXCEPTION 1 : A trust or charge A person ( called beneficiary) in whose favour a trust or other interest in some specific immovable property has been created can enforce it even though he is not a party to the contract e.g. Khwaja Mohd Khan Vs Hussaini Begum (marriage of SA & DB, A agrees with B) EXCEPTION 2 : Marriage settlement, Partition or other family arrangements When an arrangement is made in connection with marriage, partition or other family arrangements and a provision is made for the benefit of a person, he may sue although he is not a party to the agreement. e.g. Daropti Vs Jaspat Rai ( 2 brothers, separation & equal investment for maintenance of mother)
17 EXCEPTIONS to Privity of Contract
EXCEPTION 3 : Acknowledgement or estoppel Where the promisor by his conduct, acknowledges or otherwise constitutes himself as an agent of a third party, a binding obligation is thereby incurred by him towards the third party. e.g. A receives some money from T to be paid over to P. A admits of this receipt to P. P can recover the amount from A who shall be regarded as the agent of P. EXCEPTION 4 : Assignment of a contract The assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties. e.g. The holder of a Negotiable instrument in due course can realise the amount on it even though there is no contract between him and the person liable to pay.
18 EXCEPTIONS to Privity of Contract
EXCEPTION 5 : Contracts entered into through an agent The principal can enforce the contracts entered into by his agent provided the agent acts within the scope of his authority and in the name of the principal. EXCEPTION 6 : Covenants running with the land In the cases of transfer of immovable property, the purchaser of land with notice that the owner of the land is bound by certain conditions or covenants created by an agreement affecting the land shall be bound by them although he was not party to the original agreement which contained the conditions or covenants.
19 Contract without consideration - Void
20 Contract without consideration - Void
The general rule is ex nudo pacto non oritur actio i.e. an agreement made without consideration is void. However, Sec 25 and 185 of the Contract Act, 1872 deals with exceptions to this rule. In such cases the agreements are enforceable even though they are made without consideration.
21 A contract without consideration is void – Exceptions
EXCEPTION 1 : Love and Affection Where an agreement is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing in a near relationship to each other, it is enforceable even if there is no consideration. A written and registered agreement based on natural love and affection between near relatives is enforceable even if it is without consideration. e.g. Venkataswamy Vs Rangaswamy (R laible to pay B, V agrees to discharge the same) EXCEPTION 2 : Compensation for voluntary services A promise to compensate, wholly or in part, a person who has already voluntary done something for the promisor, is enforceable, even though without consideration e.g. A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is a contract.
22 A contract without consideration is void – Exceptions
EXCEPTION 3 : Promise to pay a time barred debt A promise by a debtor to pay a time barred debt is enforceable provided it is made in writing and is signed by the debtor or by his agent generally or specially authorised in that behalf. The promise may be to pay the whole or any part of the debt. The debt must be such “ of which the creditor might have enforced payment but for the law for the limitation of suits”. A debt is time barred by limitation if it remains unpaid or unclaimed for a period of three years. Such a debt becomes legally irrevocable e.g. D owes C Rs. 1,000 but the debt is barred by the Limitation Act. D signs a written promise to pay C Rs. 500 on account of the debt. This is a contract. EXCEPTION 4 : Completed gifts The rule “ No consideration, no contract” does not apply to completed gifts.
23 A contract without consideration is void – Exceptions
EXCEPTION 5 : Agency No consideration is necessary to create an agency. EXCEPTION 6 : Charitable subscription Where the promissee on the strength promise makes commitments i.e. chagnes his position to this determines i.e. changes his position to his detriment.
24 CAPACITY TO CONTRACT
25 The parties who enter into a contract must have the capacity to do so
The parties who enter into a contract must have the capacity to do so. ‘Capacity’ here means competence of the parties to enter into a valid contract. According to section 10, an agreement becomes a contract if it is entered into between the parties who are competent to contract. According to Section 11, every person is competent to contract who Is of the age of majority according to the law to which he is subject Is of sound mind Is not disqualified from contracting by any law to which he is subject Thus Section 11 declares the following persons to be incompetent to contract; Minors Persons of unsound mind Persons disqualified by any law to which they are subject.
27 According to Section 3 of the Indian Majority Act, 1875, a minor is a person who has not completed eighteen years of age. In the following two cases, he attains majority only after twenty – one years of age: Where a guardian of a minor’s person or property has been appointed under the Guardians or Wards Act, 1890, or Where the superintendence of a minor’s property is assumed by a Court of Wards. The rules governing minor’s agreements are based on two fundamental rules: RULE 1 The law protects minors against their own inexperience and against the possible improper design of those more experienced. RULE 2 In pursuing the above object, the law should not cause unnecessary hardship to persons who deal with minors.
28 POSITION OF A MINOR AS REGARDS HIS AGREEMENTS
29 An agreement with or by minor is void and inoperative ab initio
EXAMPLE In Mohiri Bibi v Dharmodas Ghose, a minor mortgaged his house in favour of a money lender to secure a loan of Rs. 20,000 out of which the mortgagee ( Money – lender) paid the minor a sum of Rs. 8,000. Subsequently the minor sued for setting aside the mortgage, stating that he was underage when he executed the mortgage. It was held that the mortgage was void and, therefore, it was cancelled. Further the money-lender’s request for the repayment of the amount advanced to the minor as part of the consideration for the mortgage was also not accepted.
30 2. Minor can be a promisee or a beneficiary
Incapacity of a minor to enter into a contract means incapacity to bind himself by a contract. There is nothing which debars him from becoming a beneficiary, eg: a payee or a promisee in a contract. Such contracts may be enforced at his option, but not at the option of the other party. The law does not regard him as incapable of accepting a benefit. EXAMPLES M, aged 17, agreed to purchase a second-hand scooter for Rs. 25,000 from S. He paid Rs. 5,000 as advance and agreed to pay the balance the next day and collect the scooter. When he came with the money the next day, S told him that he had changed his mind and offered him to return the advance. S cannot avoid the contract, though M may, if he likes. A, a minor, under a contract of sale delivered goods to the buyer. Held, he was entitled to maintain a suit for the recovery of price.
31 3. Minor’s agreement cannot be ratified by him on attaining the age of majority.
It was held in Nazir Ahmed v Jiwan Das that Consideration which passed under the earlier contract cannot be implied into the contract which the minor enters on attaining majority. Thus consideration given during minority is no consideration. If it is necessary a fresh contract may be entered into by the minor on attaining majority provided it is supported by fresh consideration. However, services rendered at the desire of the minor expressed during his minority and continued at the same request after his majority form a good consideration for a subsequent express promise by him in favour of the person who rendered the services. EXAMPLES M, a minor, borrows Rs. 5,000 from L and executes a promissory note in favour of L. After attaining majority, he executes another promissory note in settlement of the first note. The second promissory note is void for the want of Consideration.
32 4. If a minor has received any benefit under a void agreement, he cannot be asked to compensate or pay for it. EXAMPLE M, a minor, obtains a loan by mortgaging his property. He is not liable to refund the loan. Not only this, even his mortgaged property cannot be made liable to pay the debt. 5. Minor can always plead minority Even if a minor has, by misrepresenting his age, induced the other party to contract with him, he cannot be sued either in contract or in tort for fraud because if the injured party were allowed to sue for fraud, it would give him an indirect means of enforcing the void agreement. S, a minor, by fraudulently representing himself to be of full age, induced L to lend him 400 pounds. He refused to repay it and L sued him for the money. It was held that the contract was void and S was not liable to repay the amount.
33 6. There can be no specific performance of the agreements entered into by a minor as they are void ab initio. A contract entered into on behalf of a minor by his parent/guardian or the manager of his estate can be specifically enforced by or against the minor provided the contract is : Within the scope of authority of the parent/guardian/manager, and for the benefit of the minor. 7. Minor cannot enter into a contract of partnership Even though a minor cannot enter into a contract of partnership, he my be admitted to the benefits of an already existing partnership with the consent of the other partners. 8. A minor cannot be adjudicated insolvent. This is so because he is incapable of contracting debts. 9. Minor is liable for ‘necessaries’ supplied or necessary services rendered to him or anyone whom he is legally bound to support.
34 10. Minor can be an agent An agent is merely a connecting link between his principal and a third party. As soon as the principal and the third party are brought together, the agent drops out. A minor binds the principal by his acts without incurring any personal liability. 11. Minor’s parents/guardian are not liable for the contract entered into by the minor, even though the contract is for the supply of necessaries to the minor. But if the minor is acting as an agent for the parents/guardian, the parents/guardian shall be liable under the contract. 12. A minor is liable in tort ( a civil wrong), but where a tort arises out of a contract a minor is not liable in tort as an indirect way of enforcing an invalid contract.
35 Minor’s Liability for necessaries
A minor is liable to pay out of his property for ‘necessaries’ supplied to him or to anyone whom he is legally bound to support. The claim arises not out of contract but out of what is called quasi-contracts. Again, it is only the property of the minor which is liable for meeting the liability arising out of such contracts. He is not personally liable. Necessaries include the following: Necessary goods – Necessary goods are not restricted to articles which are required to maintain a bare existence, such as bread and clothes, but include articles which are reasonably necessary to the minor having regard to his station in life. A watch and a bicycle may well be considered to be necessaries. An engagement ring may be necessary but not a vanity bag brought for the minor’s fiancé. EXAMPLE I, a minor, bought eleven fancy waistcoats from N. He was at that time adequately provided with clothes. It was held that the waistcoats were not necessaries, and I was not liable to pay for any of them.
36 2. Services rendered Certain services rendered to a minor have been held to be necessaries. These include education, training for a trade, medical advice, legal advice, provision of a funeral for deceased husband of a minor widow, and a house given to a minor on rent for the purpose of living and continuing his studies. As regards contracts which are not for the supply of necessaries but which are undoubtedly beneficial to the minor, the private estate of the minor is liable. EXAMPLE G, a minor, entered into a contract with R, a noted billiards player, to pay him a certain sum of money to learn the game and play matches with him during his world tour. R spent time and money in making arrangements for the billiards matches. It was held that G was liable to pay as the agreement was the one for necessaries as it was in effect “ for teaching, instruction, and employment and was reasonable and for the benefit of the infant.”
37 3. Loan incurred to obtain necessaries.
A loan taken by a minor to obtain necessaries also binds him and is recoverable by the lender as if he himself had supplied the necessaries. But the minor is not personally liable. It is only his estate which is liable for such loans.
38 PERSONS OF UNSOUND MIND
One of the essential conditions of competence of parties to a contract is that they should be of sound mind. Section 12 lays down a test of soundness of mind. It reads as follows: “A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interest”. A person who is usually of unsound mind but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. EXAMPLE A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
39 CONTRACTS OF PERSONS OF UNSOUND MIND.
1. Lunatics A lunatic is a person who is mentally deranged due to some mental strain or other personal experience. He suffers from intermittent intervals of sanity and insanity. He can enter into contracts during the period when he is of sound mind. 2. Idiots An idiot is a person who has completely lost his mental powers. He does not exhibit understanding of even ordinary matters. Idiocy is permanent whereas lunacy denoted periodical insanity with lucid intervals. An agreement of an idiot, like that of a minor, is void. 3. Drunken or intoxicated persons. A drunken or intoxicated person suffers from temporary incapacity to contract i.e. at the time when he is so drunk or intoxicated that he is incapable of forming a rational judgment. The position of a drunken or intoxicated person is similar to that of a lunatic.
40 OTHER PERSONS 1. Alien Enemies An alien ( the subject of a foreign State) is a person who is not a subject of the Republic of India. He may be: An alien Friend An alien Enemy Contracts with an alien friend ( an alien whose State is at peace with the Republic of India), subject to certain restrictions, are valid. Contracts with an alien Enemy 9 an alien whose State is at war with the Republic of India) may be studied under the two heads, namely – Contracts during the war, and Contracts made before the war. During the continuance of the war, an alien enemy can neither contract with an Indian subject nor can he sue in an Indian court. He can do so only after he receives a license from the Central Government.
41 Contracts made before the war may either be suspended or dissolved
Contracts made before the war may either be suspended or dissolved. They will be dissolved if they are against the public policy or if their performance would benefit the enemy. For this purpose even an Indian who resides voluntary in a hostile country, or who is carrying on business there would be treated as an alien enemy. 2. Foreign Sovereigns, their diplomatic staff and accredited representatives of foreign states. They have some special privileges and generally cannot be sued unless thy of their own submit to the jurisdiction of our court laws. They can enter into contracts and enforce those contracts in our courts. But an Indian citizen has to obtain a prior sanction of the Central Government in order to sue them in our law courts. An ex-king can, however, be sued against in our courts without any such sanction. The Central Government grants permission to sue a foreign sovereign or ambassador, etc When he has instituted a suit in a court against the person desiring to sue him; or Where he himself or through his agent carries on trade within the jurisdiction of the Court; or Where he is in possession of immovable property in the jurisdiction of the court and is to be sued with reference to such property; or When he has expressly waived the privilege accorded to him.
42 3. Corporations A Corporation is an artificial person created by law, having a legal existence apart from its members. It may come into existence by a Special Act of the Legislature or by registration under the Companies Act, As regards a statutory Corporation i.e. a corporation formed by a Special Act of the Legislature, its contractual capacity is limited by the Statute governing it. As regards a corporation formed under the Companies Act, 1956 ( Commonly know as a joint stock company), its contractual capacity is regulated by the terms of its Memorandum of Association and the provisions of he Companies Act. If it exceeds its powers, whether expressly conferred on it or derived by reasonable implication from its objects clause in the Memorandum, the contract is ultra-virus the company and is void. Further it cannot enter into contracts of a strictly personal nature as it is an artificial and not a natural person.
43 4. Insolvents When a debtor is adjudicated insolvent, his property vests in the Official Receiver or Official Assignee. As such the insolvent is deprived of his power to deal in that property. It is only the Official Receiver or Official Assignee who can enter into contracts relating to his property, and sue and be sued on his behalf. The insolvent also suffers from certain disqualifications which are removed when the Courts passes an order of discharge. 5. Convicts A convict when undergoing imprisonment is incapable of entering into a contract. He can, however, enter into, or sue on, a contract if he is lawfully at large under a license called “ticket to leave”. This incapacity to contract, or sue on a contract, comes to an end when the period of sentence expires or when he is pardoned. The convict, However, does not suffer from the rigours of the Law of Limitation. Limitation is held in abeyance during the period of his sentence.
45 Section 10 All agreements are contracts if they are made by the free consent of parties. Meaning of Consent: ( Section 13) Consent means acquiescence or act of assenting to an offer. “Two or more persons are said to consent when they agree upon the same thing in the sense. Meaning of Free Consent: Consent is said to be free when it is not caused by – Coercion as defined in Section 15, or Undue Influence as defined in Section 16, or Fraud as defined in Section 17, or Misrepresentation as defined in Section 18, or Mistake ( Section 14)
46 Where there is no consent, there is no contract
Where there is no consent, there is no contract. If there is no Consensus ad idem, there is no contract EXAMPLE: An illiterate woman executed a deed of gift in favour of her nephew under the impression that she is executing a deed authorizing her nephew to manage her lands. The evidence showed that the woman never intended to execute such a deed of gift, nor was the deed ever read or explained to her. Held that the deed was void and inoperative. But where there is consent, but it is not free, i.e. where it is caused by coercion, undue influence, fraud or misrepresentation, the contract is voidable at the option of the party whose consent is so caused ( Section 19 & 19 – A) A is forced to sign a promissory note at the point of pistol. A knows what he is signing but his consent is not free. The contract in this case is voidable at his option.
48 When a person is compelled o enter into a contract by the use of force by the other party or under a threat, “coercion” is said to be employed. Coercion is the committing, or threatening to commit, any act forbidden by the Indian Penal Code, 1860 or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person, whatever, with the intention of causing any person to enter into an agreement. The threat amounting to coercion need not necessarily proceed from a party to the contract. It may proceed even from a stranger to the contract. Likewise, it may be directed against any body - not necessarily the other contracting party. The intention of the person using coercion should, however, be to cause any person to enter into an agreement Coercion includes fear, physical compulsion and menace to the goods. EXAMPLE: A threatens to kill B if he does not lend Rs. 1,000 to C. B agrees to lend the amount to C. The agreement is entered into under Coercion.
49 Consent is said to be caused by coercion when it is obtained by:
Committing or threatening to commit any act forbidden by the Indian Penal Code, 1860. EXAMPLE: A young girl of 13 years was forced to adopt a boy to her husband who had just died by the relatives of the husband who prevented the removal of his body for cremation until she consented. It was held that the consent was not free but was induced by coercion. Consequently, the adoption was set aside. 2. Unlawful detaining or threatening to detain any property. The Government gave a threat of attachment against the property of P for the recovery of the fine due from T, the son of P. P paid the fine. Held that the contract was induced by coercion.
50 EFFECT OF COERCION When consent to an agreement is consent, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused ( Section 19) According to Section 72, a person to whom money has been paid, or anything delivered by mistake or under coercion, must repay or return it. EXAMPLE: A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for the carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive. The onus of proving that the consent of the party to a contract was caused by coercion and that he would not have entered into it had the coercion not been employed, lies on the party who wants to relive himself of the consequences of coercion.
52 Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. This happens when a special kind of relationship exists between the parties such that one party is in a position to exercise Undue Influence over the other. Section 16 defines Undue Influence as follows A Contract is said to be influenced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. A person is deemed to be in a position to dominate the will of another Where he holds a real or apparent authority over the other. e.g. the relation between doctor and patient, master and servant Where he stands in a fiduciary relation ( relation of trust and confidence) to the other. It is supposed to exist, for example, between father and son, solicitor and client, trustee and beneficiary and promoter and company.
53 c. Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress. Such a relation exists, for example, between a medical attendant and his patient. EXAMPLE A having advanced money to his son, B, during his minority, obtains upon B’s coming of age, by misuse of parental influence, a bond for a greater amount than the sum due in respect of the advance. A employs undue influence. A spiritual guru induced his devotee to gift to him the whole of his property in return of a promise of salvation of the devotee. It was held that the consent of the devotee was given under undue influence. Undue Influence is also called moral coercion.
54 EFFECT OF UNDUE INFLUENCE.
When consent to an agreement is obtained by undue influence, the agreement is a contract voidable at the option of the party whose consent was so obtained. Any such contract may be set aside either absolutely or if the party who is entitled to avoid it has received any benefit there under, upon such terms and conditions as to the court may seem just and equitable. EXAMPLE A’s son has forged B’s name to a promissory note. B under the threat of prosecuting A’s son obtains a bond from A for the amount of the forged note. If B sues on this bond, the Court may set the bond aside. The granting of relief on account of undue influence is founded on the principle of correcting abuses of confidence.
55 RELATIONSHIPS WHICH RAISE PRESUMPTION OF UNDUE INFLUENCE
The following relationships usually raise a presumption of undue influence Parent and Child Guardian and Ward Trustee and Beneficiary Religious advisor & Disciple Doctor and Patient Solicitor and Client Fiancé and Fiancée. The presumption of the Undue Influence applies whenever the relationship between the parties is such that one of them is, by reason of confidence reposed in him by the other, able to take unfair advantage over the other.
56 BURDEN OF PROOF In an action to avoid a contract on the ground of undue influence, the plaintiff has to establish that – The other part was in a position to dominate his will. Mere proof of nearness of relationship is not sufficient for the Court to assume that one relation was in a position to dominate the will of the other. The other actually used his influence to obtain the plaintiff’s consent to the contract; and The transaction is unreasonable. EXAMPLE A being in debt to B, a money-lender of his village, contracts a fresh loan on terms which appear to be unreasonable. It lies on B to prove that the contract was not induced by undue influence.
57 REBUTTING THE PRESUMPTION OF UNDUE INFLUENCE
The presumption of Undue Influence can be rebutted by showing that – Full disclosure of facts was made by the influencing party to the party alleged to have been influenced at the time of entering into the Contract. The price was adequate: Inadequacy of consideration is only an evidence of undue influence. It is however, not conclusive. Mere pecuniary inadequacy of consideration will not generally make the terms of the contract seem too unfair for enforcement unless the degree of inadequacy is extreme. The inadequacy must be so extreme so as to call for interposition of equity, either offensively or defensively. That the weaker party was in receipt of independent advice, before making a promise. The mere fact that independent advice was received will not necessarily save the transaction. The advice, it must be shown, was competent and based on knowledge of all relevant facts.
58 CONTRACTS WITH PARDANASHIN WOMAN
A contract with a pardanashin woman is presumed to have been induced by undue influence. A pardanashin woman is one who observes complete seclusion because of the custom of the particular community to which she belongs. A woman who goes to the Court and gives evidence settles rents with tenants and collects rents, communicates in matters of business with men other than the members of her family, is not a pardanashin woman. A pardanashin woman is, in view of her particular situation, especially open to undue influence. Any person who enters into a contract with a pardanashin woman has strictly to prove that no undue influence was used and that she had free and independent advice, understood the contents of the contract and exercised her free will.
59 The law throws around her a special cloak of protection
The law throws around her a special cloak of protection. The court, when called upon to deal with a deed executed by a pardanashin woman must satisfy upon evidence: That the deed was executed actually by her with full understanding of what she was about to do; 2. That she had full knowledge of the nature and effect of the transaction in which she is said to have entered; and 3. She had independent and disinterested advice in the matter.
61 A statement of fact which one party makes in the course of negotiations with a view to inducing the other party to enter into a contract is known as a representation. A representation when wrongly made, either innocently or intentionally, is a misrepresentation. Misrepresentation may be- An innocent or unintentional misrepresentation, or An intentional, deliberate or willful misrepresentation with an intent to deceive or defraud the other party. The former is called “Misrepresentation” and the latter “fraud” Misrepresentation is a false statement which the person making it honestly believes it to be true or which he does not know to be false. It also includes non-disclosure of a material fact or facts without any intent to deceive the other party.
62 Definition of Misrepresentation.
Sec 18 defines Misrepresentation. According to it, there is misrepresentation – When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes it to be true. When there is breach of duty by a person which brings an advantage to the person committing it by misleading another to his prejudice. When a party causes, however innocently, the other party to the agreement to make a mistake as to the substance of the thing which is subject of the agreement. EXAMPLE A, while selling his mare to B, tells him that the mare is thoroughly sound. A genuinely believes the mare to be sound although he has no sufficient ground for the belief. Later on B finds the mare to be unsound. The representation made by A is a misrepresentation.
63 REQUIREMENTS OF MISREPRESENTATION
A Misrepresentation is relevant if it satisfies the following requirements: It must be a representation of material fact. Mere expression of opinion does not amount to misrepresentation even if it turns out to be wrong. It must be made before the conclusion of the contract with a view to inducing the other party to enter into the contract. It must be made with the intention that it should be acted upon by the person to whom it is addressed. It must actually have been acted upon and must have induced the contract. It must be wrong but the person whop made it honestly believed it to be true. It must be made without any intention to deceive the other party. It need not be made directly to the plaintiff. A wrong statement o facts to a third person with the intention of communicating it to the plaintiff, also amounts to misrepresentation.
64 CONSEQUENCES OF MISREPRESENTATION
The aggrieved party, in case of misrepresentation by the other party, can- Avoid or rescind the contract; or Accept the contract but insist that he shall be placed in the position in which he would have been if the representation made had been true. LOSS OF RIGHT OF RESCESSION The aggrieved party loses the right to rescind or avoid the contract for misrepresentation – If he, after becoming aware of the misrepresentation or fraud, takes a benefit under the contract or in some other way affirms it. If restoration to the original position of the parties is not possible. EXAMPLE where the subject-matter of the contract has been consumed or destroyed. If a third party has acquired rights in the subject matter of contract in good faith and for value.
66 Fraud exists when it is shown that-
A false representation has been made (a) Knowingly, or (b) without belief in its truth, or (c) recklessly, not caring whether it is true or false, and the maker intended the other party to act upon it, or There is a concealment of a material fact or that there is a partial statement of a fact in such a manner that the withholding of what is not stated makes that which is stated false. The intention of the party making fraudulent misrepresentation must be to deceive the other party to the contract or to induce him to enter into a contract.
67 As per Section 17, Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent with intent to deceive or to induce a person to enter into a contract : The suggestion that a fact is true when it is not true and the person making the suggestion does not believe it to be true ; 2. The active concealment of a fact by a person having knowledge or belief of the fact ; 3. A promise made without any intention of performing it ; 4. Any other fact fitted to deceive ; 5. Any such act or omission as the law specially declares to be fraudulent.
68 EXAMPLE : A sells, by auction, to B a horse which A knows to be unsound. A says nothing to B about horse’s unsoundness. This is not fraud in A. B is A’s daughter and has just come of age. Here the relation between the parties would make it A’s duty to tell B if the horse is unsound. B says to A, “ If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here A’s silence is equivalent to speech. A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.
69 ESSENTIAL ELEMENTS OF FRAUD.
There must be a representation or assertion and it must be false. Without a representation or assertion there can be no fraud except in cases where silence may itself amount to fraud or where there is an effective concealment of a fact. If a representation is true when it is made, but to the knowledge of the party making it, becomes untrue before the contract is entered into, it must be corrected. If it is not corrected, the other party can rescind the contract. The representation must relate to a material fact which exists now or existed in the past. A mere opinion, commendatory or puffing expression or hearsay or flourishing description, is not regarded as representation of fact. EXAMPLE A vendor of a piece of land told a prospective purchaser that, in his opinion, the land would carry 2,000 sheep. In fact the land would carry a number less than this. Held that there was no misrepresentation as the statement was one of opinion which was honestly held.
70 The representation must have been made before the conclusion of the contract with the intention of inducing the other party to act upon it. Not only must the representation be false and made with the knowledge of its falsity, but it must also be made with an intent to deceive the other party. The representation or statement must have been made with a knowledge of its falsity or without belief in its truth or recklessly, not caring whether it is true or false. EXAMPLE : A company issued a prospectus giving false information about the unbounded wealth of Nevada. A shareholder who had taken shares on the faith of the prospectus wanted to avoid the contract. It was held that he could do so as the false representation in the prospectus amounted to fraud.
71 The other party must have been induced to act upon the representation or assertion
A mere falsehood is not enough to give a right of action. It must have induced the other party to act upon it. The other party cannot shut his eyes to the obvious defects or flaws which he could have easily ascertained by reasonable investigation or inspection. EXAMPLE A bought shares in a company on the faith of a prospectus which contained an untrue statement that one B was a director of the company. A had never heard of B and, therefore, the statement was immaterial from his point of view. A’s claim for damages in this case was dismissed because the untrue statement had not induced A to buy the shares.
72 The other party must have relied upon the representation and must have been deceived.
A mere attempt at deceit by one party is not fraud unless the other party is actually deceived. If a representation does not come to the notice of a party, it cannot be said to have mislead that party because it does not lead that party at all. EXAMPLE: T bought a cannon from H. The cannon was defective but H had plugged it. T did not examine the cannon, but when he used it, it burst. It was held that as the plug had not deceived T, he was liable to pay. The other party, acting on the representation or assertion, must have subsequently suffered some loss. It is a common rule of law “ that there is no fraud without damage”. As such “ fraud without damage” or “ damage without fraud” does not give rise to an action or deceit.
73 CONSEQUENCES OF FRAUD A contract induces by fraud is voidable at the option of the party defrauded. Until it is avoided, it is valid. The party defrauded has however the following remedies : He can rescind the contract. Where he does so, he must act within a reasonable time. If in the interval, while he is deliberating, an innocent third party has acquired an interest in the property for value, he cannot rescind the contract. EXAMPLE A purchases certain goods from B by making a misrepresentation. A sells the goods to X before B avoids the contract. B loses the right to avoid the contract. He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have been if the representation made had been true. He can sue for damages.
74 CONTRACT NO NECESSARILY VOIDABLE – EXCEPTIONS
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of he party whose consent was so caused. But in the following cases, the contract is not voidable : Where the consent of a party to a contract was so caused by misrepresentation or fraud and that party could discover the truth by ordinary diligence. The phrase “ ordinary diligence” means such diligence as a prudent man would take in his own case under similar circumstances. EXAMPLE A, by misrepresentation, leads R erroneously to believe that five hundred tonnes of indigo are made annually at his factory. B examines the accounts of the factory, which shows that only four hundred tonnes of indigo have been made. After this B buys the factory. The contract is not voidable on account of A’s misrepresentation.
75 Where a party enters into a contract in ignorance of the misrepresentation or fraud.
Where, before the contract is avoided, the interests of third parties intervene. But it is important that the third parties acquire interest in the subject matter for value and act bona fide. Where a party to a contract, whose consent was caused by misrepresentation or fraud, cannot be put in the position in which he would have been if the representation made had been true.
76 EXCEPTIONS TO THE ABOVE RULE
SILENCE AS TO FACTS The general rule is that a person before entering into a contract need not disclose to he other party the material facts which he knows, but he must refrain from making active concealment ( like concealing a crack on the surface of a table by filling in and repolishing it). This means mere silence is not fraud. EXAMPLE Before letting his house, a landlord failed to tell the tenant that it was in a ruinous condition. Held that he was not liable in deceit as the tenant should have inspected the house. EXCEPTIONS TO THE ABOVE RULE There are two exceptions to the above rule: Where the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak.
77 Where silence is, in itself, equivalent to speech.
EXAMPLE a SAYS TO b, “ If you do not deny it, I shall assume that the horse that you are selling me is sound”. If B says nothing his silence is equivalent to speech. If a representation becomes false due to change of circumstances at the time when the contract is entered into, although it was true at the time when it was made, it is the duty of the person who made the representation to communicate the change of circumstances. If a seller fails to inform the buyer as to a latent defect (i.e. a defect known to the seller and not apparent on an ordinary inspection0, his silence amounts to fraud. If a trustee does not make full disclosure of facts to the beneficiary while entering into a contract with him as to the property of which he is a trustee, his silence as to any material facts amounts to fraud.
79 MISTAKE Mistake of law may be Mistake of law of the country, or Mistake of law of a foreign country. Mistake of law of the country : Ignoratia juris non excusat i.e ignorance of law is no excuse, is a well settles rule of law. A party cannot be allowed to get any relief on the ground that it had done a particular act in ignorance of law. A mistake of law is, therefore, no excuse, and the contract cannot be avoided. EXAMPLE: A and B enter into a contract on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. This contract is not voidable. But if a person enters into a contract by making a mistake of law through the inducement of another, whether innocent or otherwise, the contract may be avoided. Mistake of law of a foreign country : Such a mistake is treated as a mistake of fact and the agreement in such a a case is void.
80 MISTAKE OF FACT Mistake of fact may be A bilateral mistake, or A unilateral mistake. Bilateral mistake Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral mistake. In such a case, the agreement is void. (Section 20) The following two conditions have to be fulfilled for the application of section 20 : i. The mistake must be mutual i.e., both the parties should misunderstand each other and should be at cross-purposes. EXAMPLE: A agreed to purchase B’s motor car which was lying in B’s garage. Unknown to wither party, the car and garage were completely destroyed by fire a day earlier. The agreement is void.
81 The mistake must relate to a matter of fact essential to the agreement.
As to what facts are essential in an agreement will depend upon the nature of the promise in each case. EXAMPLE : A man and a woman entered into a separation agreement under which the man agreed to pay a weekly allowance to the woman, mistakenly believing themselves lawfully married. Held, the agreement was void as there was mutual mistake on a point of fact which was material to the existence of the agreement. The various cases which fall under bilateral mistake are as follows: Mistake as to the subject matter. Where both the parties to an agreement are working under a mistake relating to the subject-matter, the agreement is void. Mistake as to the subject-matter covers the following cases:
82 Mistake as to the existence of the subject matter.
If both the parties believe the subject matter of the contract to be in existence, which in fact at the time of the contract is non-existent, the contract is void. EXAMPLE : A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void. Mistake as to the identity of the subject matter. It usually arises where one party intends to deal in one thing and the other intends to deal in another. EXAMPLE :W agreed to buy from R a cargo of cotton “ to arrive ex-peerless from Bombay”. There were two ships of that name sailing from Bombay, one sailing in October and the other in December. W meant the former ship but R meant the latter. Held, there was a mutual or a bilateral mistake and there was no contract.
83 Mistake as to the quality of the subject matter.
If the subject-matter is something essentially different from what the parties thought it to be, the agreement is void. EXAMPLE : Table napkins were sold at an auction by description “ with the crest of Charles I and the authentic property of that monarch” In fact the napkins were Georgian. Held, the agreement was void as there was a mistake as to the quality of the subject-matter. Mistake as to the quantity of the subject-matter. If both the parties are working under a mistake as to the quantity of the subject-matter, the agreement is void. EXAMPLE : A silver bar was sold under a mistake as to its weight. There was a difference in value between the weight of the bar as it was and as it was supposed to be. Held, the agreement was void.
84 Mistake as to the title to the subject-matter
If the seller is selling a thing which he is not entitled to sell and both the parties are acting under a mistake, the agreement is void. EXAMPLE : A person took a lease of a fishery which, unknown to either party, already belonged to him. Held, the lease was void. Mistake as to the price of the subject matter. If there is a mutual mistake as to the price of the subject matter, the agreement is void. EXAMPLE : C wrote to W offering to sell certain property for 1,250 pounds. He had earlier declined an offer from W to buy the same property for 2,000 pounds., W who knew that this offer of 1,250 pounds was a mistake for 2,250, immediately accepted the offer. Held, W knew perfectly well that the offer was made by mistake and hence the contract could not be enforced.
85 Mistake as to the possibility of performing the contract.
Consent is nullified if both the parties believe that an agreement in capable of being preformed when in fact this is not the case. The agreement, in such a case, is void on the ground of impossibility. Impossibility may be – Physical impossibility. EXAMPLE : A contract for the hire of a room for witnessing the coronation procession of Edward VII was held to be void because, unknown to the parties, the procession had already been cancelled. Legal impossibility A contract is void if it provides the something shall be done which cannot, as a matter of law, be done.
86 UNILATERAL MISTAKE When in a contract only one of the parties is mistaken regarding the subject-matter or in expressing or understanding the terms or the legal effect of the agreement, the mistake is unilateral mistake. According to Section 22, a contract is not voidable merely because it was cause by one of the parties to it being under a mistake as to the matter of fact. A unilateral mistake is not allowed as a defence in avoiding a contact unless the mistake is brought about by the other party’s fraud or misrepresentation. EXAMPLE : A offers to sell his house to B for an intended sum of Rs. 44,000. By mistake he makes an offer in writing of Rs. 40,000. He cannot plead mistake as a defence. EXCEPTIONS A Unilateral mistake is generally not allowed a s defence in avoiding a contract. But in certain cases, the consent is given by a party under an error or mistake which is so fundamental as goes to the root of the agreement. In such cases the agreement is void. Thus in the following cases, even though there is a unilateral mistake, the agreement is void.
87 Mistake as to the identity of the person contracted with.
It is a fundamental rule of law that if one of the parties represents himself to be some person other than he really is, there is a mistake as to the identity of the person contracted with. EXAMPLE : If A intends to contract with B but finds out that he has contracted with C, there is no contract if the identity of B was material element of the contract and C knows it. Likewise if A makes an offer to B, C cannot give himself any rights in respect of the contract by accepting the offer. If he does so, the contract is void. It should be noted that the principle holds good only when the identity of the contracting party is important. Where however, the seller is prepared to enter into contract with anyone who enters the shop, so that the identity of the purchaser is immaterial, a mistake as to the purchaser’s identity will not make the contract void.
88 Mistake as to the nature of contract.
If a person enters into a contract in the mistaken belief that he is signing the document of a different class and character altogether, there is a mistake as to the nature of contract and the contract is void. He can successfully plead non est factum ( it is not his deed,) The very basis of the contract i.e. consent, is missing in this case. Thus, where in signing a document the mind of the signer does not go with the signature, there is a mistake which would vitiate the contract. EXAMPLE : M, an old man of poor sight, indorsed a bill of exchange thinking that it was a guarantee. Held, there was no contract on the ground that the mind of the singer did not accompany the signature.
89 LEGALITY OF OBJECT
90 A contract must not only be based upon mutual consent of competent parties but must also have a lawful object. If the object of an agreement is the performance of an unlawful act, the agreement is unenforceable. Section 23 declares that the ‘object’ or the ‘consideration’ of an agreement is not lawful in certain cases. The words ‘object’ and ‘consideration’ in Section 23 are not used synonymously. They are distinct in meaning. The word ‘object’ means purpose or design. In some cases, the consideration for an agreement may be lawful but the purpose for which the agreement is entered into may be unlawful. In such cases the agreement is void. As such both the object and the consideration of an agreement must be lawful, otherwise the agreement is void.
91 WHEN CONSIDERATION OR OBJECT IS UNLAWFUL (Section 23)
The consideration or object of an agreement is unlawful – If it is forbidden by law. If the object or the consideration of an agreement is the doing of an act forbidden by law, the agreement is void. An act is forbidden by law when it is punishable by the criminal law of the country or when it is prohibited by special legislation or regulations made by a competent authority under powers derived from the Legislature. EXAMPLE : A promises to obtain for B an employment in the public service and B promises to pay Rs. 1,000 to A. The agreement is void, as the consideration for it is unlawful. If it is of such nature that, if permitted, it would defeat the provisions of any law. If the object or the consideration of an agreement is such that, though not directly forbidden by law, it would defeat the provisions of any law, the agreement is void.
92 EXAMPLE : N agreed to enter a company’s service in consideration of a weekly wage of 13 pounds and a weekly expense allowance of 6 pounds. Both the parties knew that the expense allowance was a device to evade tax. Held, the agreement was unlawful. If it is fraudulent. An agreement which is made for a fraudulent purpose is void. Thus an agreement in fraud of creditors with a view to defeating their rights is void. EXAMPLE : A, B, C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful. If it involves or implies injury to the person or property of another. ‘Injury’ means ‘wrong’, ‘harm’ or ‘damage’. ‘Person’ means one’s body. ‘Property’ includes both movable and immovable property. EXAMPLE : An agreement between some persons to purchase shares in a company, and thus by fraud and deceit to induce other persons to believe, contrary to the fact , that there is a bona fide market for the shares, is void.
93 If the Court regards it is immoral.
An agreement, the consideration or object of which is immoral, e.g. an agreement between a husband and wife for the future separation, is unlawful. EXAMPLE : A married woman was given money to enable her to obtain divorce from her husband and then to marry the lender. Held, the agreement was immoral and the lender could not recover the money. However, agreement for immediate separation between a husband and wife, both in England and in India, are enforceable. The principle underlying this is preservation of the peace and reputation of families. Similarly agreements in respect of past separation are also valid.
94 An agreement is unlawful for immorality in the following cases :
i. Where the consideration is an act of sexual immorality e.g. illicit cohabitation or prostitution. ii. Where the object of the agreement is the furtherance of sexual immorality, e.g. lending money to a prostitute to help her in her trade. Where the court regards it as opposed to public policy.
95 UNLAWFUL AND ILLEGAL AGREEMENTS.
An unlawful agreement is one which, like a void agreement, is not enforceable by law. It is void ab initio and is destitute of legal effects altogether. It affects only the immediate parties and has no further consequences. An illegal agreement, on the other hand, is not only void as between immediate parties but has this further effect that the collateral transactions to it also become tainted with illegality. EXAMPLE: A lends Rs. 5,000 to B to help him to purchase some prohibited goods from T, an alien enemy. If B enters into an agreement with T, the agreement will be illegal and the agreement between B and L shall also become illegal, being collateral to the main transaction which is illegal. L cannot, therefore, recover the amount. He can recover the amount if he did not know of the purpose of the loan. Every illegal agreement is unlawful, but every unlawful agreement is not necessarily illegal. It is sometimes difficult to decide as to whether an act is illegal or unlawful as many of the illegal and unlawful acts lie on the borderline.
96 It may, however, be observed that illegal acts are those which involve the commission of a crime or contain an element of obvious moral turpitude and where the wicked attribute is reasonably obvious or are, in some way, contract to public policy. A criminal act is one which is both forbidden by law an which is revolting to the moral sentiments of the society. A crime is something more that a mere disobedience to law. As such illegal agreements include acts opposed to public morals, e.g. an agreement for illicit cohabitation. On the other hand, unlawful acts are those which are less rigorous in effect and involve a “ non-criminal breach of law”. These acts do not affect public morals, nor do they result in the commission of a crime. These are simply disapproved by law on some ground of public policy. These include agreements in restraint of trade, marriage or legal proceedings, etc.
97 EFFECTS OF ILLEGALITY The general rule of law is that no action is allowed on an illegal; agreement. This is based on the following two maxims : Ex turpi causa non oritur actio No action arises from a base cause. The effect of this is that the law discourages people from entering into illegal agreements which arise from base causes. In pari delicto, potior est conditio defendentis. In cases of equal guilt, the defendant is in a better position. EXAMPLE : A promises to pay B Rs. 500 if he beats T. If B beats T, he cannot recover the amount from A. If A has already paid the amount and B does not beat T, A cannot recover the amount. If an agreement is illegal, the law will help neither party to the agreement. This means that a result of the refusal of the Court to help the plaintiff in recovering the amount, the defendant who is equally guilty stands to gain.
98 But in such cases, the Court allows the defendant to have that advantage, not because it approves of his conduct, but because it is not prepared to grant any relief on the basis of the illegal agreement. The Court is, in fact, neutral in such cases and as a result of that neutrality the defendant stands to gain. The effects of illegality may now be summed up as under : The collateral transactions to an illegal agreement become tainted with illegality and are treated as illegal even though they would have been lawful by themselves. No action can be taken (a) for the recovery of the money paid or property transferred under an illegal agreement, and (b) for the breach of the illegal agreement. In cases of equal guilt in an illegal agreement, the position of the defendant is better than that of the plaintiff. The plaintiff (i.e., the innocent party) may, however, sue to recover money paid or property transferred.
99 Whether illegality is severable.
A contract may contain several distinct promises or a promise to do several distinct acts of which some are legal and the others illegal, or a part of which is legal and a part of which is illegal. If the illegal promise or act is severable from the legal one, the Court will enforce the legal promise or act and reject the one which is illegal. If the illegal promise or act cannot be separated from the legal one, the whole contract is declared illegal. Reciprocal promises. Where persons reciprocally promise, firstly, to do certain things which are legal, and secondly, under specified circumstances, to do certain other things which are illegal, the first set of promises is a contract, but the second set is a void agreement. EXAMPLE : A and B agree that A shall sell B a house for Rs. 10,000 but that if B uses it as a gambling house, he shall pay Rs. 50,000 for it. The first set of reciprocal promises, namely to sell the house and pay Rs. 10,000 for it, is a contract. The second set is for an unlawful object, namely that B may use the house as a gambling house, and is a void agreement.
100 Alternative Promise, one branch being illegal.
In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced. EXAMPLE : A and B agree that A shall pay Rs. 1,000, for which B shall afterwards deliver to A either rice or smuggled opium. This is a valid contract to deliver rice, and a void agreement as to the opium. Agreements void, if consideration and objects unlawful in part. If there are several objects but there is a single consideration, the agreement is void if any one of the objects is unlawful. Similarly, if there is a single object but there are several considerations, the agreement is void if any one of the considerations are unlawful. EXAMPLES : A promises to superintend on behalf of B, a legal manufacturer of indigo and an illegal traffic in other articles. B promises to pay to A a salary of Rs. 90,000 a year. The agreement is void, the object of A’s promise and the consideration for B’s promise being in part unlawful.
101 AGREEMENTS OPPOSED TO PUBLIC POLICY
An agreement is said to be opposed to public policy when it is harmful to the public welfare. Public policy is that principle of law which holds that no subject can lawfully do that which has a mischievous tendency to be injurious to the interests of the public, or which is against the public good or public or welfare. Some of the agreements which are, or which have been held to be, opposed to public policy and are unlawful are as follows : Agreements of trading with enemy. An agreement made with made with an alien enemy in time of war is illegal on the ground of public policy. This is based upon one o the two reasons: a. either that the further performance of the agreement could involve commercial intercourse with the enemy. b. that the continued existence of agreement would confer upon the enemy an immediate or future benefit.
102 Contracts which are entered into before the outbreak of war are either suspended or dissolved according to the intention of the parties can or cannot be carried out by postponing performance til the end of hostilities. Agreement to commit a crime Where the consideration in an agreement is to commit a crime, the agreement is opposed to public policy. The Court will not enforce such an agreement. Likewise an agreement to indemnify a person against consequences of his criminal act is opposed to public policy and hence unenforceable. EXAMPLE : A promises to indemnify B in consideration of his beating C. The agreement is opposed to public policy. Agreements which interfere with administration of justice. An agreement the object of which is to interfere with the administration of justice is unlawful, being opposed to public policy. It my take any of the following forms:
103 a. Interference with the course of justice
An agreement which obstructs the ordinary process of justice is unlawful. Thus an agreement for using improper influence of any kind with the judges or officers of justice is unlawful. But an agreement to refer present or future disputes to arbitration is valid. b. Stifling prosecution It is in public interest that if a person has committed a crime, he must be prosecuted and punished. Hence an agreement not to prosecute an offender is an agreement for stifling prosecution and is unlawful. Thus where A promises to drop a prosecution which he has instituted against B for robbery, and B promises to restore the stolen property, the agreement is unlawful. But a compromise in case of compoundable offences is valid.
104 c. Maintenance and Champerty.
Maintenance is an agreement to give assistance, financial or otherwise, to another to enable him to bring or defend legal proceedings when the person giving assistance has got no legal interest of his own in the subject-matter. EXAMPLE : A offers to pay B Rs. 2,000 if B will sue C. A’s motive is to annoy C. This agreement between A and B is a maintenance agreement. Champerty is an agreement whereby one party is to assist another to bring an action for recovering money or property, and is to share in the proceeds of the action. EXAMPLE : A agrees to pay the expenses if B sues C, and B agrees to give A one-half of any proceeds received by A as a result of the said suit. This is a champertous agreement.
105 Agreements in restraint of legal proceedings
a. Agreements restricting enforcement of rights. An agreement which wholly or partially prohibits any party from enforcing his rights under or in respect of any contract is void to that extent. b. Agreements curtailing period of limitation. Agreements which curtail the period of limitation prescribed by the law of Limitation are void because their object is to defeat the provisions of law. Similarly an agreement purporting to oust the jurisdiction of the Courts is contrary to public policy. But an agreement between two or more parties to refer to arbitration any disputes which have arisen or which may arise between them is perfectly valid. EXAMPLE : The rules of a crossword competition of a weekly published by X Ltd. are (1) that the first prize will be awarded for the solution that agrees most nearly with the one kept in the sealed cover ; (2) that in matters arising in the competition, the editor’s decision shall be final and binding on the competitors ; and (3) that at the expiration of three months from the publication of the prize list, X Ltd. Shall not be liable to pay any claims unless a suit for it is then pending.
106 It was held that Rule No. 1 makes the competition a wagering agreement.
Rule No. 2 restricts persons absolutely from enforcing their rights through Court of Law and Rule No. 3 limits the time to a period shorter than the prescribed by Law of Limitation. Trafficking in Public offices and titles. Agreements for the sale or transfer of public offices and titles or for the procurement of a public recognition like Padma Vibhushan or Param Veer Chakra for monetary consideration are unlawful, being opposed to public policy. Such agreements, if enforced, would lead to inefficiency and corruption in public life. Similarly, an agreement to pay money to a public servant to induce him to act corruptly or to retire and thus make way for the appointment of the promisor or an agreement with voters to procure their votes for monetary consideration are void on the ground of public policy. EXAMPLE : A promised to obtain an employment B in a public office and B promised to pay Rs. 1,000. Held, the agreement was against public policy and illegal.
107 Agreements tending to create interest opposed to duty.
If a person enters into an agreement whereby he is bound to do something which is against his public or professional duty, the agreement is void on the ground of public policy. EXAMPLE : P directs A, his agent, to buy a certain house for him. A tells P that it cannot bought and buys the house for himself. P may on discovering that A has bought the house, compel A to sell it to him (P) at the price A gave for it. Agreements in restraint of parental rights. A father, and in his absence the mother, is the legal guardian of his/her minor child. This right of guardianship cannot be bartered away by any agreement. A father is entitled by law to the custody of his legitimate child. He cannot enter into an agreement which is inconsistent with his duties arising out of such custody. If he enters into such agreement, it shall be void on the ground of public policy.
108 Agreements restricting personal liberty.
Agreements which unduly restrict the personal freedom of the parties to it are void as being against public policy. EXAMPLE : A debtor agreed with his money-lender that he would not, without the lender’s written consent leave his job, or borrow money, or dispose of his property, or change his residence. Held that the agreement was void. Agreements in restraint of marriage. Every agreement in restraint of the marriage of any person, other than a minor, is void. This is because the law regards marriage and the married status as the right of every individual. EXAMPLE : P promised to marry L only and none else and to pay L a sum of Rs. 2,000 if he married someone else. P married X. Held, L could not recover the sum agreed as the agreement was in restraint of marriage.
109 Marriage brokerage An agreement by which a person, for a monetary consideration, promises in return to procure the marriage of another is void, being opposed to public policy. Similarly, an agreement to pay money to the parent or guardian of a minor in consideration of his/her consenting to give the minor in marriage is void, being opposed to public policy. Agreements interfering with marital duties. Any agreement which interferes with the performance of marital duties is void, being opposed to public policy. Such agreements have been held to include the following : a. A promise by a married person to marry, during the lifetime or after the death of spouse b. An agreement in contemplation of divorce c. An agreement that the husband and wife will always stay at the wife’s parents’ house and that the wife will never leave the parental house.
110 Agreements to defraud creditors or revenue authorities.
An agreement the object of which is to defraud the creditors or the revenue authorities is not enforceable, being opposed to public policy. A contract by which an employee gets an expense allowance grossly in excess of the expenses actually incurred by him is illegal and a fraud on revenue authorities. Similarly, every transfer of property which is not made (i) before and in consideration of marriage , or (ii) to a purchaser in good faith and for valuable consideration, is void against the Official Receiver or Assignee, if the transferor is adjudged insolvent on a petition presented within two years of the date of the transfer. Agreements in restraint of trade. An agreement which interferes with the liberty of a person to engage himself in any lawful trade, profession or vocations called is called an “agreement in restraint of trade”. Public policy requires that every man should be at liberty to work for himself and should not be at liberty to deprive himself of the fruit of his labour, skill or talent by any contract that he enters into. It is also in the interest of the community that every person should be at liberty to engage himself in any trade , profession or business and use his skill to the best of his capacity with the good of the community
111 Where an agreement is challenged on the ground of its being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests Once this onus is discharged, the onus of showing that the restraint is injurious to the public is upon the party attacking the contract. EXAMPLE : Out of 30 makers of combs in the city of Patna, 29 agreed to supply him and no one else all their output. R was free to reject the goods if he found no market for them. Held, the agreement was void.
112 EXCEPTIONS. The following are the exceptions to the rule that “ an agreement in restraint of trade void” : Sale of Goodwill. A seller of goodwill of a business may be restrained from carrying on (i) a similar business, (ii) within specified local limits, (iii) so long as the buyer or any other person deriving a title to the goodwill from him carries on a like business : provided (iv) that such limits don’t appear to the Court reasonable regard being had to the nature of the business. Limits means local limits and the duration of the restraint is so long as the buyer or any person deriving the title of the goodwill from him carries on the like business.
113 Partners’ agreements a. A partner shall not carry on any business other than that of the firm while he is a partner. b. An outgoing partner may agree with his partners not to carry on a business similar to that of the firm within a specified period or within specified local limits. c. Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits. d. Where the goodwill of a firm is sold after dissolution, a partner may carry on business competing with that of the buyer and he may advertise such business. But, subject to agreement between him and the buyer, he may not (a) use the firm name, (b) represent himself as carrying on the business of the firm, or © solicit custom of persons who were dealing with the firm before its dissolution.
114 e. Any partner may, upon the sale of goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits.
115 TRADE COMBINATIONS. Traders and manufacturers in the same lien of business normally form associations to regulate business or to fix prices. The regulations as to the opening and closing of business in a market, licensing of traders, supervision and control of dealers and the mode of dealing are not unlawful even if they are in restraint of trade. EXAMPLE : An agreement between certain ice manufacturing companies not to sell ice below a stated price and to divide the profits in a certain proportion is not void. Such agreements are neither in restraint of trade nor opposed to public policy.
116 SERVICE CONTRACTS. Sometimes an employee, by the terms of his service agreement, is prevented from accepting – Any other engagement during his employment, and/or A similar engagement after the termination of his services. As regards the first restraint, it is valid and is not in restraint of trade if it is to operate while the employee is contractually bound to serve his employer. As regards the second restraint, it is void if its object is merely to restraint competition by an employee in his employers’ business. Therefore, a restraint on an employee not to engage in a similar business or not to accept a similar engagement, after the termination of his services is void. If a restraint is intended to protect an employer against an employee making use of trade secrets learned by him in the course of his employment, the restraint is valid provided it is not for any other purpose also.
118 An agreement, though it might possess all the essential elements of a valid contract, must not have been expressly declared as void by any law in force in the country. The Contract Act specifically declares certain agreements to be void. A void agreement is one which is not enforceable by law. Such agreement does not give rise to any legal consequences and is void ab initio.
119 VOID AGREEMENTS The following agreements have been expressly declared to be void by the Contract Act : Agreements by incompetent parties Agreements made under a mutual mistake of fact Agreements the consideration or object of which is unlawful Agreements made without consideration Agreements in restraint of marriage Agreements in restraint of trade Agreements in restraint of legal proceedings Agreements the meaning of which is uncertain Agreements by way of wager
120 Agreements contingent on impossible events
Agreements to do impossible acts In case of reciprocal promises to do things legal and other things illegal, the second set of reciprocal promises is void agreement. Point 1 to 8 done earlier
121 Agreements the meaning of which is uncertain.
Agreements, the meaning of which is not certain, or capable of being made certain, are void. The uncertainty may be as to Existence of, Quality of Quantity of Price of Title to, the subject matter. EXAMPLES A agrees to sell to B “100 tons of oil”. There is nothing to show what kind of oil was intended. The agreement is void for uncertainty. A agrees to sell to B “100 tons of oil of a specified description, known as an article of commerce. There is no uncertainty here to make the agreement void.
122 Wagering agreements or wager.
A Wager is an agreement between two parties by which one promises to pay money or money’s worth on the happening of some uncertain event in consideration of the other party’s promise to pay if the event does not happen. Thus if A and B enter into an agreement that a shall pay B Rs if it rains on Monday, and that B shall pay A the same amount if it does not rain, it is a wagering agreement. The event may be uncertain either because it is to happen in future or if it has already happened, the parties are uncertain and express opposite views such as whether the Raj College were the champions in wrestling in 1990, or whether the result of an election which is over has gone in favour of party X or party Y. The essence of gambling and wagering is that one party is to win and the other to lose upon a future event, which at the time of the contract is of an uncertain nature, that is to say, if the event turns out one way A will lose but if it turns out the other way he will win.
123 ESSENTIALS OF A WAGERING AGREEMENT
It is essential to a wagering contract that each party under it either win or lose , whether he will win or lose being dependent on the issue of the event , and therefore remaining uncertain until that issue is known. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract. ESSENTIALS OF A WAGERING AGREEMENT 1. Promise to pay money or money’s worth. The wagering agreement must contain a promise to pay money or money’s worth. Uncertain event The promise must be conditional on an event happening or not happening. A wager generally contemplates a future event, but it may also relate to a past event provided the parties are not aware of its result or the time of its happening.
124 Each party must stand to win or lose
Upon the determination of the contemplated event, each party should stand to win or lose. An agreement is not a wager if either of the parties may win but cannot lose or may lose but cannot win. No control over the event. Neither party should have control over the happening of the event one way or the other. If one of the parties has the event in his own hands, the transaction lacks an essential ingredient of a wager. No other interest in the event. Lastly, neither party should have any interest in the happening or non-happening of the event other than the sum or stake he will lose or win. Thus an agreement is not a wager if the party to whom money is promised on the occurrence of an event has an interest in its “non-occurrence" That is why a contract of insurance is not a wagering agreement.
125 FOLLOWING TRANSACTIONS ARE NOT WAGERS.
EXAMPLES In a wrestling bout, A tells B that wrestler no 1 will win. B challenges the statement of A. They bet with each other over the result of the bout. This is a wagering agreement. An agreement, or a share market transaction, to settle the difference between the contract price and the market of certain goods or shares on a specified day, is a wagering transaction. FOLLOWING TRANSACTIONS ARE NOT WAGERS. A crossword competition involving a good measure of skill for its successful solution. But if prizes of a crossword competition depend upon the correspondence of the competitor’s solution with a previously prepared solution kept with the editor of a news paper, it is a lottery and a wagering transaction. According to Prize Competition Act, 1955, prize4 competitions in games of skill are not wagers provided the amount of prize does not exceed Rs. 1,000.
126 Games of skill, e.g. picture puzzles or athletic competitions.
EXAMPLE : Two wrestlers agreed to enter into a wrestling contest on the condition that the party failing to appear on the day fixed was to forfeit Rs and the winner was to be rewarded Rs. 1,125 out of the sale of the proceeds ticket. Held, the agreement was not one of wagering. A subscription or contribution or an agreement to subscribe or contribute toward any plate (a cup or other prize for a race or other contest), prize or sum of money of the value of Rs. 500 or above to be awarded to the winner or winners of a horse race. Share market transactions in which delivery of stocks and hares is intended to be given and taken. A Contract of Insurance . Contracts of Insurance and wagering agreements : Contracts of insurance bear a certain superficial resemblance to wagering agreements, but they are really transactions of a different character. The principal differences between the two are as follows :
127 In insurance, the assured has an insurable interest in the subject-matter. In a wagering agreement, there is no such interest. In insurance, both the parties are interested in the protection of the subject-matter whereas in a wagering agreement it is only one of the parties who is interested in its protection. A contract of insurance, except life insurance, is a contract of indemnity. In a wagering agreement, the amount is fixed. Contracts of Insurance are beneficial to the public whereas wagering agreements do not serve any useful purpose. A contact of insurance is based on scientific and actuarial calculation of risks. A wagering agreement is just a gamble.
128 EFFECT OF WAGERING AGREEMENTS. SUIT TO RECOVER MONEY DEPOSITED.
Wagering agreements have been expressly declared to be void in India. In the State of Maharashtra and Gujarat they have been declared to be illegal. No suit can be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made. Thus, in a case, where a promissory note was executed for payment of indebtedness arising out of wagering transactions in shares, it was held that the promissory note was not enforceable by the Court. SUIT TO RECOVER MONEY DEPOSITED. Money deposited with a person (called stakeholder) to be paid to the party winning upon the wager cannot be recovered by the winner. On the other hand, the loser can recover his deposit from the stake holder. But where the stakeholder pays the money to the winner, the loser cannot recover it from him.
129 COLLATERAL TRANSACTIONS.
PRINCIPAL AND AGENT. An agent cannot recover from the principal any money paid on a wagering agreement entered into on behalf of his principal since the act done by the agent is not lawful. Where the agent fails to carry out his instructions in respect of a wagering transaction, he principal cannot sue him for breach of the contract of agency because a contract which is void cannot be the basis of a legal claim. Where the agent receives the winnings on successful bets made on behalf of his principal, he is bound to hand them over to the principal. He cannot resist the principal’s claim on the ground that he received money in respect of a void transaction. COLLATERAL TRANSACTIONS. Since wagering agreements are void, transactions collateral to them are not affected. However, in the States of Maharashtra and Gujarat, the wagering agreements have been declared to be illegal. In the rest of India, the collateral transactions are valid.
130 VOID CONTRACTS. A contingent contract to do or not to do something on the happening of an event becomes void when the event becomes impossible. A contingent contract is a contract to do or not to do something, if some event, collateral to such contract does or does not happen. EXAMPLE : A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void. A voidable contract becomes void when the party whose consent is not free repudiates the contract. EXAMPLE : A, by misrepresenting certain facts to B, enters into a contract with B. B comes to know of the misrepresentation and repudiates the contract When B repudiates the contract, it becomes void. A contract becomes void by supervening impossibility or illegality EXAMPLE : A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares was against the country in which the post is situated. The contract becomes void when war is declared.
131 CONSEQUENCES OF RECISSION OF VOIDABLE CONTRACT.
RESTITUTION. When a contract becomes void, the party who has received any benefit under it must restore it to the other [party or must compensate the other party by the value of the benefit. This restoration of the benefit is called “restitution”. The principle of restitution is that a person who has been unjustly enriched at the expense of another is required to make restitution to that other. In essence, restitution is not based on loss to the plaintiff but on benefit which is enjoyed by the defendant at the cost of the plaintiff which is unjust for the defendant to retain. CONSEQUENCES OF RECISSION OF VOIDABLE CONTRACT. When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is a promisor. The party rescinding a voidable contract shall, if he has received any benefit hereunder from another party to such contract, restore such benefit, so far as my be, to the person from whom it was received.
132 Obligation of person who has received advantage under void agreement or contract that becomes void.
When an agreement is discovered to be void o when a contract becomes void, any person who ha received any advantage under such agreement or contract is bound to restore it, or to make compensation for it , to the person from whom he received it. EXAMPLES 1. A pays B Rs. 1,000 in consideration of B’s promise to marry C, A’s daughter. C is dead at the time of the promise. The agreement is void but B must repay A Rs. 1,000